Adopting a child is a thrilling time for any family. It also means lots of changes in your life. Since it's estimated that it can cost an average of $241,080 to raise a child, one of the biggest changes will be a financial one. Fortunately, there are some ways in which your tax return can help offset these new costs.
Here's a handy guide to the 5 main ways your adoption affects your taxes for the better.
Adoption Credit. Adopting a minor child or special needs child can result in a tax credit for all the expenses of the adoption (up to $13,400 in 2015). This includes things like adoption fees, attorney and court costs or travel related to the adoption. If you fail to use this nonrefundable credit in full the first year, you may also carry forward the credit for up to the next 5 years.
Earned Income Credit. The Earned Income Credit is one of the most valuable tax credits available to families. While it's possible to qualify for it as a childless individual, it's a much higher dollar amount -- up to $6269 -- when you claim children on your return. Your income must be less than $53,505 for joint filers and $47,955 for single filers (as of 2016). To find out if you can claim the Earned Income Tax Credit, use the IRS' handy guide at their website.
Child and Dependent Care Credit. If you have to pay for child care while you and your spouse work, look for work, or are in school, you may be able to claim a tax credit for child care expenses. The amount of the credit is a percentage of your actual expenses and is based on your income. It's important to note that to qualify, the care cannot be done in your home and the provider must give you a tax identification number or Social Security number.
Child Tax Credit. This credit is easy to claim. It is $1,000 per child who is under 17 years of age at the end of the tax year and reduces your taxes dollar-for-dollar. You may also be eligible to receive a portion of this credit as a refundable credit – meaning that you can get it refunded even if you owe no tax.
Additional Dependents. Even if you don't qualify for any of the above credits, the additional dependents on your return will likely reduce your taxes. Each dependent qualifies you for an additional $4,000 in tax-free income on your return.
While finances aren't most parents' first thought when adopting a child, it's important to understand how to maximize your tax benefits to help the monthly budget. If you're unsure about how to claim any of these credits or what other benefits you might be able to receive on your taxes, consult with a qualified CPA or tax accountant for additional assistance. Then, you can spend more time with your new family and less time worrying about the money.
Contact a professional like Hy Appelbaum CPA to learn more.